Last week we talked a little about dividends and whether it is a fair to ever expect some real cash money from a successful investment. The stock answer is that if the company can invest retained earnings, given the nuances in the tax law, at an expected rate of return greater than the average investor, it should do so rather than declare a dividend. In my opinion that does not include salaries beyond the dreams of avarice or great philanthropic photo ops. Give me my money and I will pick my own charity, maybe I will get my picture in the paper.

Having said all that, how does the payment of dividends affect stock prices and price expectations, and with it option pricing? In regards to short-term stock pricing there are four dates to consider. The first date is called the dividend declaration date, which is the date the Board of Directors declares an upcoming dividend. As part of that declaration the board specifies the amount of the dividend, the record date, and the payment date. The record date is the date selected on which the shareholders must officially own shares to be entitled to the dividend, and the payment date is when the checks actually are sent to the shareholders on the books at the record date. The record date means the date when shares have settled, so in order to buy a stock and receive the dividend your stock purchase must be made 3 business days before the record date to allow time for the stock to settle. The day 2 business days before the record date is known as the ex date, when the stock is said to be trading ex-dividend, or without the dividend.

If a stock closes at $60 on the day before the ex date and pays a $.50 dividend, the next morning will show a closing price of $59.50x. If the stock were, for instance, to trade up to $60 on that day, it will show a closing price of $60x +.50. The logic here is that if the stock was worth $60 and you received a cash payment of $.50 per share the remaining "worth" of the stock would now be $.50 less, but would obviously be free to trade anywhere after the opening.

The long-term price movement of the stock is also affected by the dividend stream. If, as in this example, the company is paying out $.50 a quarter, or $2.00 a year it would certainly act as a retardant to stock price increases. The company is hopefully reinvesting those earnings it can use effectively, and returning the rest to the owners. This should cause a proper balance between growth in stock price and income to shareholders. Still, the $20 you receive in the next decade will cause the stock price to be lower than if the company retained all these funds.